Question

1. Explain why this securitization for accounting treatment as sale.

2. Compute the amounts of total assets retained after this secuiritization (round 2 decimal places)

total assets (in million $)

retained earnings (in million $)

3. Compute the amounts of total assets and retained esrnings if this securitization sid not qualify for accounting treatment as a sale (round 2 decimal places)

total assets (in million $)

retained earnings (in million $)

P8-5 Accounting for a securitization (LO 8-7 ) On December 1, 2017, Eva Corporation, a mortgage bank, has the following amounts on its balance sheet in millions): Assets Cash Mortgage receivables Investments Other assets Total Liabilities and Shareholders' Equity Notes payable Common stock Retained earnings Total 98 > 50 11 SIOS Also on December 1, 2017. Eva transfers mortgage receivables with a book value of $20.000.000 to a securitization entity (SE) The average interest rate on the mortgages is 7%. Under the terms of the agreement, the SE is legally separate from Eva. After the transfer, Eva securitizes the mortgages and sells them to investors. Because the securities are considered to be less risky than the original mortgages, the investors are willing to receive a lower rate of return and consequently remit $20.750,000 to the SE. The SE then transfers the $20,750,000 to Eva Corporation. Eva does not direct the activities of the SE and will not participate in any of the SE's gains or losses

Answer 1

1. Explain why this securitization for accounting treatment as sale.

2. Compute the amounts of total assets retained after this secuiritization (round 2 decimal places)

3. Compute the amounts of total assets and retained earnings if this securitization did not qualify for accounting treatment as a sale (round 2 decimal places).

Refer to the below images for more detailed solution.

ent : : securitization for accounting treatment Explain why this as sate . Deasurement Answer: wer: FASB Ase 860-10-40 on the subject of conditions for a sale of financial assets states that a financial asset should be considered sold if it is transferred and control is sur control is deemed to be sorrendered if transferred assets are solated from the transferor, the transferee's rights to pledge (or) exchange the assets are not impaired the transferor does not maintain effective Control over the transferred assets via a repurchase Cory other agreemen The Scenario regarding Eva's Securitization appears these criteria and thus the Securitization qualifies for sale accounting of total assets retained u after a compute the announts this secoritiachon : Reagoirement @ particolars Armount (in millions) Assets : cash [not $20.75] Mortgage receivables [158-820] Investments other assets Toral $ 30.75 $38.00 $ 27.00 4 13.00 $ 108.75 liabilities is Shareholders eaquity : Notes payable common Stock Retaimed earrings [347 +4 075 Total & 50.00 11.00 ] $ 47.75 & 108.73

compute earrings Accounting the amounts of total assets it this securitization did not and retained quality for Requixement (3. treatment ara salen Amount (in millions) particulars Assets : cast [slot $20.75] Mortgage receivables Investments other assets $30075 $58.00 $27.00 $ 13.00 Total $128.75 Liabilities y Shareholder's equity : Notes payable [i 50+ $20075] common stock Retained earrings $ 70-75 $ 11.00 $ 47.00 Toral $ 128.75